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Daily Newsletter, Tuesday, 06/20/2006

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Table of Contents

  1. Market Wrap
  2. New Plays
  3. In Play Updates and Reviews

Market Wrap

Where's the Beef?

A good trader friend, John, has been asking me that question lately. Every time we get a rally we don't seem to get much follow through. The internals of the rallies are either "too much too fast" and flame out quickly (a mark of short covering rallies in a bear market) or they lack punch with less than normal volume and less than inspiring internals. Last week's rally from the low on Thursday is a good example. We saw very strong internals if you looked at advancing volume vs. declining volume. Too strong really--in excess of 10:1. And sure enough there's been no follow through since the high put in on Friday morning. We had an opening pop on Friday morning as follow through to Thursday's rally and then nothing.

Today we had the makings of a break to the upside but the downtrend held. This morning's rally was turned around and the bulls gave up everything they gained. Actually the DOW at least kept some of its gain but the S&P 500, COMP and RUT gave it all back plus a little extra since they ended marginally in the red. Are we seeing rotation into the bluest of the blue chips again? If so we know how well that turned out for the market last time that happened (the DOW lead the way to the highs in May).

If I put on my rose-colored glasses though (that would be the bullish pair), I see the possibility that we have simply been consolidating the past three days. Perhaps we'll have a little more consolidating to do before the next leg up. The DOW, naturally, gives me the strongest bullish feeling in this regard. We had a strong impulsive rally off last week's low and now we're just motoring sideways. This sideways consolidation should lead to further upside. Therefore, while the other indices are looking more bearish, I have a feeling we haven't seen the last of the buying. From a short term perspective though, it's hard to determine whether or not we're going to see a further dip before the buyers step back in (or shorts are forced to cover again). We'll see what we can glean from the charts.

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We'll spend most of the time in this report looking at charts because frankly there's not much else going on. It's been a light economic week, including today, and even the news rooms seemed to be slow.

As a reminder for the week, so you'll know who's writing which Market Wrap when this week, I (Keene Little) am writing tonight in place of Jim who will be writing Wednesday's Wrap. I will be writing Thursday's and then we'll be back to a normal schedule.

The two economic reports today were Building Permits and Housing Starts, both of which came out at 8:30 AM. Equity futures rallied a little off the news but whenever I see futures make a move before the cash open it always makes me suspect. The futures are moved a lot easier than the cash market and many times it seems some of the bigger houses try to move futures one way so that they have the ability to trade against that move when cash opens. So this morning's move up would be a good time for the Boyz to sell into it if that was their intention. After this morning's open we did in fact see a little bit of a settle as the futures, with cash following, dropped back near the point where price was before the 8:30 reports. But then the market reversed and headed higher into the afternoon. Too bad it couldn't continue.

Back to the reports, new construction of U.S. houses increased 5% in May after three months of declines. While confidence among builders continues to weaken, housing starts rose to a seasonally adjusted annual rate of 1.96M in May, a 5% increase and stronger than the expected 1.86M. Starts of single-family houses rose 2.1% to 1.59M in May, while starts of large apartment units rose 19.7% to 371,000. With fewer and fewer people able to buy homes, especially as banks rein in aggressive lending practices, there will probably be more pressure on rentals. That might explain some of the emphasis on large apartment buildings. On the down side, building permits, a leading indicator of housing construction, fell 2.1% to a seasonally adjusted annual rate of 1.93M from 1.97M in April.

Analysts attributed the increase in construction to an unusually dry spring in many parts of the country which allowed builders to start work on more new homes. But this may have been a 1-month shot in the arm for this construction industry as the analysts cautioned that a slowing housing market (feeling the impact of higher mortgage rates) could see a further slide in construction activity. The drop in building permits backs up that expectation.

The builders sense a further slow down as well. The sentiment among U.S. home builders fell in June making it the 6th month in a row and it has now dropped to an 11-year low. The housing market index dropped four points to 42, the lowest since April 1995. May's reading was revised up to 46 from 45. Readings over 50 indicate most builders think business conditions are good or fair. The index was at 68 in October and peaked at 72 in June. It has fallen in eight of the past nine months. If you look at the chart of the Home Construction Index you will see that investors started selling off about this time.

The index declined in all four regions of the nation in June, but the West is still feeling a stronger demand and their index remains positive at 61. I can see it in Seattle where home prices and sales are still relatively strong. But even here realtors tell me it's starting to slow faster than they expected. The other three areas of the country declined in June. The U.S. index has declined in 10 of the past 12 months, falling by a total of 30 points, matching the largest year-over-year plunge in the 21-year history of the index. We knew this was coming (you did, right?) and it's only a question of how bad the correction will be--shallow longer term correction or swift and steeper decline. I'm thinking relatively shallow this year (although it's been pretty steep the past few months) but then the decline will kick into gear next year.

Overall the price patterns are leaving me guessing about the short term direction. I'm getting a bearish sense looking at some of the major indices which makes me think we'll immediately head for new lows below the June lows. But the current pullbacks lead me to believe we'll see at least another leg up first. Looking at the charts we can see a similarity between the indices

DOW chart, Daily

A strong bounce off the June low took the DOW up to its 20-dma. As the center of the Bollinger Band this is an important moving average that shows the intermediate trend. If the 20-dma, currently at 11027, can not be recaptured, the bears will continue to rule. The 200-dma at 10893 is even more important for the bulls to hold so we've got a tight range to help us determine where the market will head next. I think a drop below 10800 would be bearish.

SPX chart, Daily

SPX looks more bearish than the DOW based on its inability to get back above its 200-dma. After bouncing off the June low it failed the retest of the 200-dma--the kiss goodbye. The bulls could make a nice run if SPX can get back above 1261 otherwise a drop below 1230 would look bearish and the June lows would be at risk of breaking.

Nasdaq chart, Daily

If the DOW is relatively strong and SPX relatively weak, then the COMP is sickly. It is stuck well below its 200-dma and couldn't even make it up for a test of its 20-dma. Additionally, the 50-dma is dropping hard and is getting ready to cross its 200-dma. This would be a longer term sell signal for many managed funds. Currently price is trying to hold onto it uptrend line from August 2002.

QQQQ chart, Daily

While the COMP looks very bearish, and the QQQQ could be interpreted as just as bearish (it too couldn't get back above its 20-dma), the larger wave count supports the idea that the June low could have been the completion of a larger pullback from the January high. This would mean we should get a rally (probably choppy) through the summer that takes us to new market highs. I have to admit that scenario is not looking particularly good right now.

SOX index, Daily chart

Another bounce, another kiss goodbye. After breaking its uptrend line from April 2005 the SOX gave it a perfect retest and failed. That's a sell signal pure and simple, with a stop just above the trend line. Take those every time since your risk is minimal. It'll be interesting now to see whether or not the daily oscillators will get this turned around and headed back up.

BKX banking index, Daily chart

The banks bounced hard off the 200-dma last week but have been struggling since. Short term the current pullback gives me the impression that this will head higher again and at least give us an a-b-c bounce that might even reach for the 50-dma. Unfortunately the securities broker index gives me the opposite impression.

Securities broker index, Daily chart

The securities broker index looks downright bearish. If the 200-dma continues to hold down this index I'd get short and stay there for a while. If it manages to push back up then we'll probably see a retest of the broken uptrend line from May 2005, currently near 213.

U.S. Home Construction Index chart, DJUSHB, Daily

The housing index remains trapped in a very tight parallel down-channel, making the decline look particularly bearish. Eventually we'll get a break of this channel which will set up a larger sideways/up correction before heading lower again. The price objective near 500 continues to look like the right one.

Oil chart, August contract, Daily

Oil's pattern is beginning to look like a descending wedge which would be bullish. The uptrend line near $68.50 or the 200-dma approaching $66.60 make for good downside targets, although the descending wedge, with a small throw-under, suggest support more in the $68 area.

Oil Index chart, Daily

If the oil index keeps heading lower then that will tell us oil will likely break its uptrend line and head south with this index. Currently flip-flopping on both sides of the 200-dma leaves us guessing which way this is going to go.

Transportation Index chart, TRAN, Daily

The Trannies almost made it up to its 50-dma today, which was more bullish than the broader market. But price hasn't quite broken its downtrend yet and looks bearish by that measure. A rally above 4700 would be bullish but until then it's questionable.

U.S. Dollar chart, Daily

The US dollar has a Fib target area of $88.36-86.64 and that's where price has been struggling. The uptrend line from January 2005 is slightly higher so this area will be strong resistance. I expect the dollar to head lower again once this is finished. That could then give us a bounce in the metals.

Gold chart, August contract, Daily

The currently bounce in gold may lead to one more drop to its uptrend line near $550, possibly even down to a Fib projection at $531. But this should be getting close to a larger bounce, potentially back up to at least $625.

Results of today's economic reports and tomorrow's reports include the following:

Tomorrow is even quieter than today as far as economic reports go--only Crude Inventories at 10:30 AM. The market will be left to its own devices and worries so that could mean retail trading will rule the day and we know how choppy that can get.

Sector action was mixed today, reflecting prices which for the most part closed at the flat line. Those in the red were led by the oil service (OSX), healthcare, disk drives, biotech and the SOX. Those in the green were led by gold and silver, airlines, securities brokers and Transports. The rest were essentially flat on the day.

Market internals also reflected price action, with a slightly more bearish tone than what we saw in the prices. With decliners beating advancers and declining issues edging out advancing issues it mirrored the broader market. But new 52-week lows swamped new highs 378 to 82. When we see this coupled with the DOW holding up, it smacks of distribution and rotation into the biggest large caps so that the large funds can sell quickly if needed. Overall volume today, was low at less than 4B and that further makes it a challenge to determine where the market is heading short term.

We'll need some additional price action to help discern the short term direction of the market. Longer term traders on both sides should be a little nervous right here. I suspect any move to lows below June's will mean a hard and fast decline so be out of long positions if that were to happen. It's possible we'll see a move higher still but the way it's been going so far--either strong but short-lived shots higher or very choppy and whipsawing moves--it's been tough to play the long side. I don't see that changing. We're into summer time trading and the lower volume (as we saw today) makes it that much more difficult.

Hopefully by my Market Wrap on Thursday we'll have a few more answers as to what the market is doing. In the meantime, be careful if you're day trading this--take profits quickly and then reevaluate for the next trade. Longer term traders will need to establish their stop levels while we wait for direction here. See you Thursday. Jim will be writing tomorrow's Wrap.
 


New Plays

Play Updates

Updates On Latest Picks

Long Play Updates

Asta Funding - ASFI - close: 34.20 change: +0.11 stop: 33.95

The game isn't over yet for ASFI. The stock tried to bounce today. While the bounce failed under the $35.00 level some of the technical indicators saw some improvement. We're still on the sidelines with a suggested entry point at $36.01. If ASFI trades under its simple 200-dma readers might want to consider bearish plays.

Picked on June xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 08/08/06 (unconfirmed)
Average Daily Volume: 165 thousand

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A.S.V.Inc. - ASVI - close: 20.36 change: +0.10 stop: 19.45

ASVI did not see a whole lot of improvement today. A 0.49% gain is fine but shares closed well off their highs for the session, which looks bearish. We would be careful here about initiating new plays. More conservative traders might want to tighten their stops toward $20.00. We do not want to hold over the company's earnings report in late July.

Picked on June 18 at $21.20
Change since picked: - 0.84
Earnings Date 07/27/06 (unconfirmed)
Average Daily Volume: 463 thousand

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Archstone - ASN - close: 49.53 chg: -0.24 stop: 48.99 *new*

ASN continues to consolidate sideways and it's pulling the once bullish technical oscillators into bearish patterns. We're going to raise our stop loss to $48.99. More conservative traders may just want to exit early right now to protect their capital. You can always re-enter on a breakout above the $50.25 level. Our target is the $53.85-54.00.

Picked on June 05 at $50.21
Change since picked: - 0.68
Earnings Date 07/26/06 (unconfirmed)
Average Daily Volume: 989 thousand

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Syneron Med. - ELOS - close: 21.16 change: +0.18 stop: 19.99

ELOS still looks bullish with its short-term trend of higher lows. The stock added 0.85% today and looks poised to breakout higher. Aggressive traders may want to go long the stock now. We're going to stick to our plan with a trigger at $21.51. If triggered our target will be the $23.85-24.00 level. We may have to adjust this target to account for the descending 50-dma, which may act as resistance.

Picked on June xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 08/03/06 (unconfirmed)
Average Daily Volume: 615 thousand

---

Energy Transfer - ETP - close: 43.72 chg: -0.18 stop: 41.99

Oil stocks are still trading lower and the oil service stocks are really under performing. Fortunately, ETP is still showing relative strength with only a minor loss. We're still expecting ETP to drift toward the $43.00 level so watch for a bounce above $43.00 as a potential entry point. Our target is the $47.50-48.00 range.

Picked on June 18 at $44.25
Change since picked: - 0.53
Earnings Date 07/10/06 (unconfirmed)
Average Daily Volume: 149 thousand

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Potlatch - PCH - close: 37.84 chg: -0.13 stop: 36.99

We see no changes from our previous updates on PCH. We're seriously thinking about exiting early with this play. More conservative traders may want to exit now. We're going to hold on and see if we can exit closer to the $39.00 level. The stock is churning between $39.00 and $37.15. The bad news is that shares look headed toward $37.15 right now.

Picked on June 04 at $39.39
Change since picked: - 1.55
Earnings Date 07/17/06 (unconfirmed)
Average Daily Volume: 362 thousand

---

Ryanair - RYAAY - close: 52.89 change: +0.68 stop: 49.95

Airline stocks were on the move today. An upgrade for JetBlue helped inspire a 1.99% gain in the XAL airline index. Shares of RYAAY added 1.3% to post their best closing high in over a month. Our goal is the $53.90-54.00 range, where we expect RYAAY to have resistance at its trendline of lower highs.

Picked on June 08 at $51.34
Change since picked: + 1.55
Earnings Date 07/31/06 (unconfirmed)
Average Daily Volume: 304 thousand

---

Starbucks - SBUX - close: 35.83 chg: -0.13 stop: 34.98

There are no changes from our previous updates on SBUX. Currently our strategy calls for a trigger to go long at $37.05. If triggered we'll target a rally into the $39.95-40.00 range.

Picked on June xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 08/02/06 (unconfirmed)
Average Daily Volume: 6.0 million

---

Verizon Comm. - VZ - close: 32.74 change: +0.57 stop: 31.24

Traders bought the dip in VZ near $32.00 this morning and the stock bounced for a hefty 1.77% gain on above average volume. The next obstacle for the bulls is a breakout past the 100-dma near $33.00. Our target is the $34.75-35.00 range.

Picked on June 18 at $32.54
Change since picked: + 0.20
Earnings Date 07/25/06 (unconfirmed)
Average Daily Volume: 9.8 million
 

Short Play Updates

Avid Tech. - AVID - close: 34.45 change: -0.59 stop: 38.25*new*

AVID continues to show relative weakness with another 1.68% decline. The stock closed at new multi-year lows again. The drop under $35.00 looks like another bearish entry point but you may not want the risk since we're keeping our stop loss above the simple 50-dma. Speaking of our stop loss we're going to lower it to $38.25. Our target is the $32.50 mark.

Picked on June 11 at $37.35
Change since picked: - 2.90
Earnings Date 08/03/06 (unconfirmed)
Average Daily Volume: 763 thousand

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Cntrl Vermont Pub.Srv - CV - cls: 16.11 chg: -0.51 stop: 17.65*new*

The sell-off appears to be picking up speed in CV. Shares lost another 3% on above average volume today. The stock also closed under support in the $16.50 region. We are lowering our stop loss to $17.65. Our target is the $15.50 level.

Picked on June 18 at $17.02
Change since picked: - 0.91
Earnings Date 08/07/06 (unconfirmed)
Average Daily Volume: 46 thousand

---

The Geo Group Inc. - GGI - cls: 33.22 chg: -1.05 stop: 35.05 *new*

Tuesday produced an interesting session for GGI. The stock started off strong and then sank lower. By the closing bell GGI had produced a bearish engulfing candlestick pattern (bearish reversal). This actually looks like a new entry point for shorts although we'd probably use a tight stop (maybe above today's high). We're going to adjust our stop loss to $35.05. Our conservative target was the $32.25 level and our aggressive target is the $30.25 level.

Picked on June 11 at $34.14
Change since picked: - 0.92
Earnings Date 05/04/06 (confirmed)
Average Daily Volume: 135 thousand

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Juniper Networks - JNPR - close: 15.92 chg: +0.03 stop: 17.05

We remain bearish on JNPR. If 3 cents is the best oversold bounce it can produce then the bulls are in trouble. We're suggesting shorts with JNPR under $16.00. More conservative traders may want to see a new relative low under $15.65 first. Our target is the $14.10-14.00 range. We do not want to hold over the mid July earnings report. The P&F chart looks very bearish with an $8.50 target.

Picked on June 19 at $15.89
Change since picked: + 0.03
Earnings Date 07/19/06 (unconfirmed)
Average Daily Volume: 13.8 million

---

4 Kids Enter. - KDE - close: 15.56 change: +0.26 stop: 16.05

KDE produced an oversold bounce today to the tune of 1.69%. The bounce may not be over yet. Watch for a failed rally under $16.00 and/or its 10-dma as a new bearish entry point for shorts. Our target is the $12.60-12.50 range.

Picked on June 19 at $15.45
Change since picked: + 0.11
Earnings Date 08/09/06 (unconfirmed)
Average Daily Volume: 113 thousand

---

Medtronic - MDT - close: 49.75 change: +0.00 stop: 51.01

Wow! Believe it or not we're still on the sidelines with MDT. The low today was $49.50 and our trigger to short the stock is at $49.49. The breakdown under $50.00 and its 50-dma is definitely bearish so more aggressive traders may want to jump in early. Our target is the $45.50-45.00 range. We do not want to hold over the August earnings report.

Picked on June xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 08/22/06 (unconfirmed)
Average Daily Volume: 10.8 million

---

Middlesex Water - MSEX - close: 16.50 change: -0.47 stop: 17.75

Our bearish play on MSEX has now been opened. The stock finally broke down under support at the $17.00 level and hit our trigger to short it at $16.90. Volume on the decline came in above average. Our target is the $15.15-15.00 range. The P&F chart points to a $12.00 target.

Picked on June 20 at $16.90
Change since picked: - 0.40
Earnings Date 05/08/06 (confirmed)
Average Daily Volume: 28 thousand

---

NitroMed - NTMD - close: 5.16 change: +0.47 stop: 5.71

Be careful here! We think NTMD started to see a technical bounce and then shares probably succumbed to some short covering and it fed on itself with a spike to $5.69. We are not suggesting new bearish positions at this time. Double-check your stop loss placement. Our target is the $3.70-3.60 range.

Picked on June 18 at $ 5.07
Change since picked: + 0.09
Earnings Date 07/31/06 (unconfirmed)
Average Daily Volume: 710 thousand

---

Blue Nile - NILE - close: 29.82 chg: +0.66 stop: 31.55

NILE is trying to bounce on us. The stock added 2.2% today but failed to close over the $30.00 level. Don't forget that NILE has a high degree of short interest and uneasy bears could panic on any sign of real strength. We might choose to exit early if NILE trades over $30.50. We're not suggesting new bearish positions. Our target is the $25.50-25.00 range.

Picked on June 08 at $29.45
Change since picked: + 0.37
Earnings Date 08/01/06 (unconfirmed)
Average Daily Volume: 212 thousand

---

Redback Networks - RBAK - cls: 19.41 chg: -0.26 stop: 21.01

We do not see any changes from our previous updates on RBAK. Our target is the $16.50 level. The P&F chart is bearish and points to a $12.00 target. We do not want to hold over the mid July earnings report.

Picked on June 19 at $19.75
Change since picked: - 0.34
Earnings Date 07/19/06 (unconfirmed)
Average Daily Volume: 1.8 million

---

Sun Hydraulics - SNHY - cls: 17.49 chg: -0.22 stop: 18.51

On your mark. Get set. SNHY lost another 1.24% and is nearing our trigger to short it at $17.45. Aggressive traders may want to open short positions here. Our target is the $15.10-15.00 range. The P&F chart looks pretty bearish with a $7.00 target.

Picked on June xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 08/08/06 (unconfirmed)
Average Daily Volume: 89 thousand

---

Tellabs - TLAB - close: 14.33 change: +0.28 stop: 15.01

TLAB bounced from $13.92 and closed with a 1.99% gain, which was just enough to erase yesterday's losses. Volume came in well above the average. It sounds like there were new rumors of TLAB as a takeover target again. If a takeout does occur TLAB could gap open higher, which is our biggest risk right now! More conservative traders may not want to have short positions in TLAB at the moment. Our target is the $12.50 mark just above the simple 200-dma. We do not want to hold over the company's July earnings report.

Picked on June 18 at $14.32
Change since picked: + 0.01
Earnings Date 07/25/06 (unconfirmed)
Average Daily Volume: 5.9 million
 

Closed Long Plays

Watson Wyatt - WW - close: 33.75 chg: -0.65 stop: 33.80

Look out below! We've been stopped out of WW at $33.80. This is the first close under the $34.00 level in several weeks and the first significant close under its 50-dma in several months. The recent sell-off has produced a new sell signal on the weekly chart's MACD indicator. Nimble traders might just want to switch to bearish short positions right here!

Picked on June 15 at $34.71
Change since picked: - 0.96
Earnings Date 08/08/06 (unconfirmed)
Average Daily Volume: 183 thousand
 

Closed Short Plays

None
 

Today's Newsletter Notes: Market Wrap by Keene H. Little and all other plays and content by the Option Investor staff.

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